Bankruptcy Court Holds That Transferee Not Liable For Intentional Fraudulent Transfer Where Funds Were Returned To Debtor

Section 544 of the Bankruptcy Code permits a bankruptcy trustee to avoid any transfer that would be avoidable by creditors under state fraudulent transfer law. Section 550 of the Bankruptcy Code permits the bankruptcy trustee to recover from the transferee the transferred property in a fraudulent transfer avoided under section 550. Where funds were transferred in an intentional fraudulent transfer, but subsequently an equal or greater quantity of funds were transferred back to the debtor from the transferee, can the trustee still recover from the transferee? The Bankruptcy Court for the Eastern District of Pennsylvania recently considered this question in In re Incare LLC, Adv. No. 14-0248, 2018 Bankr. LEXIS 1339 (E.D. Pa. May 7, 2018), and held that the answer was no, the trustee cannot recover.

The debtor in this bankruptcy case is Incare, LLC (“Incare”), a medical services provider wholly owned by Dr. Mehdi Nikparvar. Incare filed for bankruptcy in 2013. In 2014, the chapter 7 trustee (the “Trustee”) commenced an adversary proceeding against Dr. Nikparvar and certain persons and entities related to him, seeking to avoid certain allegedly fraudulent transfers and recover the transferred funds. A trial on these claims was conducted in March 2017.

The Court found that Dr. Nikparvar controlled Incare and several other health care companies, including Advanced Urgent Care P.C (“Advanced”). A former Incare employee sued Incare in 2010 and was awarded a $400,000 judgment, and based on that judgment obtained a freeze of Incare’s bank account. The Court found that, after the freeze was reversed, Dr. Nikparvar transferred large sums of money from Incare to Advanced Urgent Care to keep Incare’s bank account from being garnished again. Over the course of May to December 2010, Incare transferred a total of $1.8 million to Advanced. Over the same period of time, however, Advanced transferred $1.8 million to Incare. The Trustee sought to avoid certain of these 2010 transfers from Incare to Advanced.

The Bankruptcy Court concluded that the transfers from Incare to Advanced were intentional fraudulent transfers that could be avoided under the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”). The Court pointed to Nikparvar’s admission that his transfers had the intent of preventing the former employee from again attaching Incare’s bank account, which the Court held amounted to showing that the transfers were made with intent to hinder or delay creditors. Since Nikparvar controlled both Incare and Advanced, his intent was imputed to them. While PUFTA provides a defense to a transferee who receives a transfer in good faith and for reasonably equivalent value, here there was no good faith, so Advanced had no such defense.

However, the Bankruptcy Court proceeded to distinguish the power to avoid a transfer under section 544 from the power to recover from the transferee under section 550. While the transfers were avoidable under PUFTA, and therefore under section 544, the Court pointed to prior case law finding that recovery under section 550 should be limited in accordance with equitable principles grounded in the purposes of section 550 and the Bankruptcy Code. The Trustee emphasized that this case involved intentional fraudulent transfer, which involves intent, rather than constructive fraudulent transfer, which need not, and the Bankruptcy Court acknowledged that intentional fraudulent transfer involves wrongdoing. It further acknowledged that barring recovery under these circumstances might permit a wrongdoer to undertake the transfer, attain some benefit from it, and then undo it. But the Bankruptcy Court reasoned, nonetheless, that the purpose of transfer avoidance under the Bankruptcy Code is remedial rather than penal, and here, there was no harm to creditors as a body, because the funds that left Incare were later restored. The Court noted also that the Eleventh Circuit had reached a similar conclusion in In re Kingsley, 518 F.3d 874, 877-78 (11th Cir. 2008). It thus held that the Trustee was not entitled to recover under section 550.